Technology columnist, Esther Dyson, talks about her work with creating new start-ups.

Last month, I participated in a meeting sponsored by the Clinton Global Initiative, the giant philanthropy, which focused on creating more jobs in the United States - presumably a goal shared by most countries. Our little group - made up of philanthropists, a few entrepreneurs, venture capitalists, and "angel" investors - concentrated on start-up companies, the source of so much commercial energy and of so many jobs.

We spent a lot of time considering which short-term measures (specifically excluding government regulations and policy) could make a difference. We came to the conclusion that what start-ups need most is greater access to mentors. Yes, they need money, contacts, customers, and knowledge, but often the best way to get almost all of these is through help and advice from experienced mentors.

There were lots of good ideas: large companies could second redundant managers, technicians, and professionals to act as mentors for local start-ups. Professional associations could team up with incubators. Entrepreneurs could organize and join Meetup groups to share experiences, and they could invite potential mentors to speak to their groups. (I'm on the board of Meetup.)

But, in the end, even though the investors were there to help, it was clear that there is a fundamental mismatch in the real world. Venture capitalists try to pick winners and help them; philanthropists try to help more people become winners. Venture capitalists want to fund the next Facebook, while philanthropists want to use Facebook to support good causes.

Looking for winners, venture capitalists use what signals they can to weed people out. When I get e-mails from would-be entrepreneurs, I can dismiss them easily if they spell my name wrong - or, indeed, if they spell anything wrong. If they can't be bothered to get the details right, why should I waste my time with them?

If they have an unclear marketing plan or lack relevant experience in their target market, I can save myself time and move on to the next opportunity. Other VCs focus almost exclusively on Stanford and Harvard graduates, not because they believe that only people from those elite campuses can succeed, but because they already have too many opportunities and want to limit their "search costs."

A philanthropist has a different approach. How much does it really matter if an entrepreneur can't spell, as long as she can hire a copywriter who can? If there is no marketing plan, perhaps the philanthropist can help the founder develop one, or suggest a particular approach to follow or an expert to hire. If the entrepreneur is focused on a small but needy market, the venture capitalist will suggest shifting focus, whereas the philanthropist will help him figure out how to serve that market effectively.

Of course, these two approaches are not fundamentally incompatible - and a good economy needs both. But it does help to understand the dynamics underlying each approach, and to make trade-offs explicitly rather than blindly. Venture capitalists would argue, correctly, that companies such as Google and eBay make life more efficient and convenient for everyone. And philanthropists would reply, correctly, that in order to prosper, large companies need a healthy economy and a fair income distribution, not just a few winners. Each side needs the other - and needs to keep the other side in check.

Both groups often make the mistake of short-term thinking: venture capitalists behave too much like stock traders, and philanthropists often give money to strangers instead of donating time (as a mentor!) to make a charity more effective. Venture capitalists trying to build world-scale companies don't focus much on the environment around them, but angel investors, even finance-oriented angels, tend to invest in a particular community and understand that the health of their business ultimately depends on the health of the schools and the economy around them. Venture capitalists who fancy themselves global thinkers should likewise think long-term about the health of the world around them.

No one expects venture capitalists to divert their resources to village schools, but perhaps they could focus a little more on training new employees rather than poaching them from the competition at inflated salaries. They could also encourage their employees to donate their time to a local entrepreneurs' club. This is already happening more than one might think, and it has more impact (on customers and employees as well as on recipients) than donating money to a charity.

An efficient market works best at allocating resources even for mentoring services, but it works on more than just money. Potential mentors may be motivated not by money or even generosity, but by pride: they want to be recognized for the wisdom that they can share. Like entrepreneurs, they may want to solve problems and have an impact (but without doing so full-time). They may want a chance to try things again through someone else. Some of them may even be venture capitalists in their day jobs!

As for the entrepreneurs and the people they hire to launch their start-ups, people need jobs, but they also create start-ups to solve a problem that bothers them or to pursue an opportunity that inspires them. They may want freedom from a corporation, or freedom to do things in a way that they could not in their old job.

In fact, the primary way a "market" approach can lead to bad outcomes, when venture capitalists destroy competition and actually harm the market, is through predatory behavior or the more common practice of buying competitors they cannot beat. To be sure, an economy without a few big winners won't have enough disruption, economies of scale, and inspirational examples to be as dynamic as the US once was. Ultimately, however, an economy in which there are only a few big winners won't have enough customers to support them.

Esther Dyson, CEO of EDventure Holdings, is an active investor in a variety of start-ups around the world. Her interests include information technology, health care, private aviation, and space travel.

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Comments (1)

Edison :

Surely the ABC can source a local business columnist for this topic? Australian startups and the financing environment they must navigate are a world away from what is happening in the US.

There's a load of us looking for sage advice in a notoriously tough market, but insights such as "Other VC's focus almost exclusively on Stanford and Harvard graduates" isn't really helpful for a UNSW graduate from North Ryde, now is it?

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